Speculation Based on Speculation

Months and months of speculation finally came to an end on January 27, when Apple shared the iPad with the world.

Regardless of whether you think that the iPad is a game changer (perhaps), a wonderful product (absolutely), or a disappointing flop (are you kidding me???), I am reminded of the wonderful quote from Mark Twain: “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”

I love this quote because it applied to both forms of speculation, each of which apply to the iPad.

To engage in a course of reasoning often based on inconclusive evidence.

To engage in the buying or selling of a commodity with an element of risk on the chance of profit.

I hope I don’t need to review for anyone the months of over-the-top speculation – first in blogs, then in traditional media, and even in day-to-day conversation. It got to the point that the speculation itself became the news story. The Vancouver Sun. The Washington Post. PC Magazine. The USA Today. And on, and on, and on.

Now, don’t get me wrong – I enjoy a good dose of idle speculation about what the future might bring. After all, I am a venture capital investor – it is my job to forecast the directions of markets and technologies and place bets on where those trends will intersect in the future. But what I do think is a crying shame is when small investors (many of whom don’t have the resources for financial speculation) see such a flood of product speculation and use it as a basis for deciding to financially speculate.

What do I mean by this financial speculation? I mean purchasing stock shortly before an event like Apple’s iPad announcement on January 27, hoping for a quick increase in the stock price once the world at large learns hears about the announcement.

This is the wrong thing to do on so many levels.

When months of speculation raises expectations to such a fevered pitch, the actual announcement is almost always going to result in a let-down.

All that speculation was just speculation – much of it turned out to be wrong.

When speculation has been as wide-spread as that about the iPad, everyone that cares can be assumed to have already learned about the product. There should not be any market inefficiencies to generate financial profit from speculation.

I make a distinction between investing, where sufficient research and analysis is done to understand the potential returns and associated risks of purchasing an asset or security, and speculating, where that research and analysis is either omitted, insufficient, or ignored in hopes that rapid returns will appear (usually because the speculator believes that he or she has some special information or understanding not available or understood by the markets as a whole). Speculation is the essence of “get rich quick” schemes.

I believe that the iPad will be a very successful product for Apple. I believe that over the next several years, Apple will generate significant revenues and profits from the new line of products that were introduced on January 27. I also believe that investors that purchase Apple stock in order to share in the revenue and profits over that several-year period will be handsomely rewarded.

But what about those that bought Apple stock right before the announcement in hopes of selling shortly thereafter for a quick return? The stock price of AAPL was $205.94 at the close of the markets on Tuesday, the day before the announcement. At the close of markets on Friday, the stock price of AAPL was $192.06 – a drop of $13.88 per share. Instead of a quick profit, the speculators had a 6.7% loss in three days.

Following this experience, I mostly see the speculators telling themselves that the markets are irrational, or the “big boys” are manipulating the markets to steal profits from the “little guys.”